Business Disposal Relief: Traps for the Unaware

By Tax-Legal PA, in association with www.lexefiscal.com

Business Disposal Relief (BDR), formerly Entrepreneurs’ Relief, is one of the more generous incentives in the UK tax code. It allows qualifying disposals to attract Capital Gains Tax at a reduced rate of 10%, up to a lifetime limit of £1 million. But that generosity is laced with technical traps, where small missteps can cost dearly.

This article highlights some of the most overlooked provisions and common pitfalls in the Taxation of Chargeable Gains Act 1992 (TCGA 1992), including sections 169S, 169SC, 169SD, 169VC(2), 169VB(2), and the often-underutilised 169VM (Investment Relief).

1. Section 169S – The Two-Year Rule

BDR applies to disposals of all or part of a business, shares in a personal company, or assets used in a business. But it’s not just about what you sell—when you sell is critical.

Section 169S(3) demands a continuous two-year qualifying period before disposal. And if the business has ceased trading, a separate time limit applies: disposal must occur within three years of cessation (s.169I(6)(b)).

Trap: Many confuse business formation with trading commencement. Preparatory activity doesn’t count. Equally, once a trade ends, the countdown to disqualification begins.

Tip: Record the exact date trade commenced. It's more than administrative—it’s vital evidence.

2. Section 169SC – Associated Disposals & Partial Use

If a business owner disposes of an asset (like property) alongside leaving the business, BDR may apply—if conditions under section 169SC are met.

Trap: Relief is restricted or denied where the asset wasn't used wholly for business. Mixed-use properties (e.g., a shop with a rented flat above) are common trouble spots.

Further Trap: If rent was charged to the business, relief can be excluded entirely (s.169SC(3)).

3. Section 169SD – Material Disposal Threshold

An associated disposal is not enough—it must tie to a “material disposal of business assets”.

Trap: A partial stake or minor asset sale won't suffice. This test requires meaningful business exit—such as retirement or divestment of a substantial interest.

4. Section 169VC(2) – Ownership & Employment Tests

For share disposals, the company must qualify as a “personal company”. That means:

· Holding at least 5% of ordinary share capital and voting rights, and

· Being an officer or employee for the full two years before disposal.

Trap: Share dilution due to new investment can unexpectedly drop the holder below the 5% threshold, losing relief entirely—even for founders.

Tip: Carefully plan equity structures before any fundraising.

5. Section 169VB(2) – The Trading Company Test

If a company holds too much in investments or rental property, it may be disqualified from BDR.

Trap: A business with too much passive income (e.g., property rental or joint ventures) may fail the "trading company" requirement—even if the owner works full time.

See McQuillan v HMRC [2017] UKUT 344 (TCC) for a cautionary tale.

6. Section 169VM – Investment Relief

Often overlooked, this relief is designed for external investors—with no employment or minimum shareholding requirement.

Conditions:

· Shares must be newly issued and subscribed for in cash.

· Held for at least three years.

· The company must be a trading company throughout.

Trap: If the company’s trade ceases or turns non-qualifying, relief can evaporate. Also, anti-avoidance rules apply if the investor is “connected” with the company (s.169VL).

Final Thoughts: A Relief Worth Protecting

BDR remains a powerful tax relief—but it’s not for the unprepared. HMRC’s stance is increasingly aggressive, and the smallest technicality can destroy a claim. From ownership thresholds to asset-use history, nothing can be assumed.

Whether you're planning an exit, restructuring shares, or advising a client, early-stage legal and tax analysis is vital. Business Disposal Relief must be earned—through structure, strategy, and scrutiny.

Need a Second Opinion?

At LEXeFISCAL LLP, we offer a detailed Business Disposal Relief & Investment Relief Review. For a fixed fee of £3,500 + VAT (valued at £5,500 + VAT), we will:

· Analyse your business structure and shareholding history

· Assess eligibility for BDR or Investment Relief

· Identify traps and planning opportunities

· Advise on pre-sale restructuring or asset-use alignment

· Prepare a claim strategy, including HMRC clearances (additional fees may apply)

We also support professional advisers with white-labelled briefings for client use.

Ready to Act?

Contact our team at LEXeFISCAL LLP for a confidential consultation. We are here not just to advise—but to solve your problems.

In the spirit of our motto, Vincent Veritas, we invite you to think inside the law, before you think outside the box.

Contact us today:

Email: info@lexefiscal.com

Tel: +44 (0)208 092 2111

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